The 2017 Estate Tax Exemption: What Does the Increase Mean for Financial Planners and Attorneys?

As of November 9, 2016 everyone in America could see the writing on the wall: 2017 will be both a year of change and a year of uncertainty.

While political changes do not always impact how financial planners and estate planning attorneys advise their clients, sometimes they do. 2017 could be one of those times. With that in mind, this article will not only address how the Estate Tax Exemption Limit is calculated, but also President-elect Donald Trump’s tax plans.

How Estate Tax is Calculated:

Essentially, the Estate Tax is a tax on a person’s right to transfer property upon his or her death. The “Gross Estate” includes everything from cash and securities to business interests to real estate. Basically everything a person owns. Certain tax deductions may be taken from the Gross Estate in order to create the “Taxable Estate.” Such deductions include, but are not limited to, mortgages, some operating business interests, property passing to a surviving spouse, and other debts. Once the deductions have been calculated and a net amount is totaled, any lifetime taxable gifts are added to the number. The tax is then reduced by the unified credit amount. All of that being said, it is important to contact a CPA or qualified attorney with experience preparing tax returns to ensure that the taxable estate amount has been properly calculated.

This year, the estate and gift tax exemption has increased to $5,490,000. This is a $40,000 jump from 2016’s $5,450,000 exemption limit. Any estates over the new exemption limit will continue to be taxed at the top estate tax rate of 40%. In the grand scheme of things, though, what does this mean for our clients? Well, for clients that were already under the exemption limit in 2016, this will not create a sweeping change. However, this increase will create more estate planning options for wealthier clients. For those clients that were over the previous exemption limit and had already used all of their exemption possibilities, the increase allows them to have an additional $40,000 ($80,000 for couples) to work with. In this instance, it is best to discuss all options for the use of the additional money and weigh those options against your clients’ current and future goals and objectives.

President-Elect Donald Trump and His Plans To Repeal the Federal Estate Tax:

A recent article published on our website discussed the effects of Hilary Clinton’s proposed tax plan. As mentioned in that article, no matter which side of the isle you found yourself on, the changes implemented by the new President in 2017 would eventually affect everyone. Now that we know who the next President will be, we can begin to prepare for those changes. President-elect Donald Trump plans to completely repeal the estate tax. According to Palmer Schoening, head of the Family Business Coalition, the repeal “will be a heavy lift but not insurmountable as it has been with [President Barack] Obama in office.”

Further, President-elect Trump’s website specifically states that “The Trump Plan will repeal the death tax, but capital gains held until death and valued over $10,000,000 will be subject to tax to exempt small businesses and family farms.” Essentially, when, or if, beneficiaries of an estate choose to sell assets they’ve inherited, the estate will be required to pay a capital gains tax on the proceeds received from such a sale.

Currently, beneficiaries receive a step-up in basis on assets received from an estate. If those beneficiaries choose to sell those assets, they would not pay capital gains. Under Trump’s plan, however, the beneficiaries would pay capital gains based on the original cost of the asset. This change is important to understand because clients that are wealthy enough to hold on to an asset and avoid paying the tax until it is favorable to do so will benefit from the new plan. On the other hand, clients that are forced to sell such assets will end up having to pay the tax.

Our Recommendation for 2017:

A lot of clients are concerned about how their estates will be affected by the proposed changes. The estate tax has been all over the place since it was initiated in 1917. The tax percentages levied have ranged from 10% in 1917 to 70% from 1976 to 1982.

The ride seems to be far from over considering the President-elect’s current plans and the fact that any changes he makes could be temporary. While both planners and attorneys should be aware of the impact changes to the estate tax could have, right now nothing much has fluctuated except for a relatively minute increase in the exemption limit. We recommend making clients aware of all options, but also to continue to focus on the here and now until any proposed changes actually come into effect.